January 11th 2018

Philadelphia Business Journal

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5 factors that will affect Greater Philadelphia’s economy in 2018

January 11, 2018

Michelle Caffrey, Reporter, Philadelphia Business Journal

Following a year that brought Greater Philadelphia continued growth, a massive change in the nation's tax code, and promises for more changes in 2018, the Philadelphia Business Journal brought together three experts on the region's local economy to weigh in on what business leaders need to keep an eye on in the year to come at the Business Journal's 2018 Economic Conference.

The panel included Economy League of Greater Philadelphia's Acting Executive Director Josh Sevin, Philadelphia Real Estate Council Chairman and Founder Andrew Benioff and Econsult Solutions' President and Principal Stephen P. Mullin, who shared their top concerns and predictions for 2018. Here are five factors that stood out in the discussion:

A growing tech economy

About a quarter of all net new jobs added from 2002 and 2015 in the region have been in one sector — tech. Sevin said that focusing on tech and tech-adjacent positions will be a crucial aspect of supporting the region’s economy.

A big part of that focus has to be on building up the tech workforce so that it’s capable of meeting rising demand for tech positions, especially in organizations that may seem to be outside of the tech sector but have large and growing IT operations, like Children’s Hospital of Philadelphia or Vanguard Group.

“Everyone is desperate for someone with seven years of coding experience to meet your needs or someone who has been doing elite, bleeding-edge cybersecurity work,” he said. “It’s a huge pain point.”

One prevailing issue is that employers aren’t investing in tech talent because competitions is so fierce, employees are easily scooped up by a competitor.

“It’s a very high-stakes game of musical chairs,” he said.

One solution that's already in the works, he said, is leveraging the region’s many higher education institutions to fill the needs and drive growth.

Commercial real estate successes, and not just in the city

Benioff said he expects the capital market surrounding the commercial real estate industry to be somewhat more careful than in 2017, but that in general, multifamily properties will continue to be a focus. While an increase in multifamily development may be tipping the equilibrium to more supply than demand, he expects it will balance out as the city’s population continues to increase.

“That demand will catch up, absolutely. Philadelphia is growing and there is a need for these type of apartments,” he said. “I think that’s going in the right direction.”

The same goes with growth in the hotel and hospitality sector as well, he said.

The key to standing out amid increasing development is experience. As e-commerce giants like Amazon make shopping at home the default and not the exception, Benioff said, offering consumers just retail shopping options isn’t enough to bring them through the doors. There has to be activities, unique dining options, added amenities, something to set a property apart.

“Those who understand that, they’ll do very well, and those who don’t and are going through the motions, building things the way they have been built for the last 100 years will not do well,” he said.

Transit-oriented development will also remain a hot item, he said, as the suburbs continue to be a draw for residents and workers who prefer living outside city limits. To him, the oft-repeated tale of the suburbs falling behind as the city grows doesn’t tell the real story.

“I think there’s an equal vibrancy to the suburbs. There are some colleagues here, who took a very contrarian view to suburban property development when everyone was running toward only doing stuff in the city, who were very successful in investing, particularly in the suburban officer sector, which a lot of people said was absolutely dead,” he said. “They’ve done very, very well in that space.”

The key to succeeding in suburban commercial real estate?

“Experience,” he repeated. “They created a food and beverage experience, they created a fitness experiences, they created an overall sense of vibrancy,” he said. “Not everybody wants to be in the city, there are a lot of people who like and value what’s going on in the suburbs, but they also want that experience.”

Mullin added that the days where sprawling suburban neighborhoods were in high demand “is going the way of the dodo bird,” and that’s a good thing, as more residential density results in a better use of resources.

Diversity

Diversity and inclusion is increasingly seen as a linchpin in efforts to maximize Philadelphia’s recent growth.

If the regional economy is going to reach the levels experts hope, making sure the more than a quarter of the city’s residents living in poverty are brought along is crucial, said Mullin.

While other growing cities are attempting to weave inclusion into their economies, Philadelphia is starting from a point where it already has a diverse population, he said.

“It’s a great opportunity for us,” he said.

The impact of tax reform

Mullin predicts that the new tax laws will have a relatively even impact across the country, but Greater Philadelphia will wind up be “a little bit worse off” since lower rates for personal income and business taxes will make the region’s own rates that much higher, percentagewise.

While the higher education sector escaped a blow in the bill as a proposal to drop the student loan interest deduction didn’t make it to the final cut, Sevin said other factors will affect how the institutions do business, such as the tax on large endowments and top five salaries over $1 million. Some adjustments are expected, he said, but the industry as a whole has already been in the midst of shifting strategies.

“That sector has already been going through extreme stress,” he said. “It didn’t need changes in the tax bill to rethink its business model.”

Benioff said their developer-in-chief expects an overall good impact on the economy but the effect it will have on property taxes, given the new property tax deduction cap, remains to be seen.

“They’re still grinding through what this actually will mean in 2018,” he said.

Local investment in infrastructure

Infrastructure improvements are expected to be a hot topic in 2018, but Sevin said after years of a decline in the scale of assistance from the federal government, he expects that local governments' willingness to invest in themselves may ultimately decide how much the federal government kicks in as well.

“Don’t be surprised if we’re forced to get into that game,” he said, giving the proposed King of Prussia rail line as an example. In order to get federal funding, state and local governments might have to step up to the plate first with significant funding of their own.

“The [feds] may be basically weighing their discretionary funding more toward localities that are raising local funds,” he said. “The irony is you’re only getting federal dollars if you show you’re really raising locally in a big way.